LONDON REAL ESTATE INVESTMENT CLIMATE OVERVIEW Published September 1, 2014
ABOUT US TROBOR Capital LLP is a United Kingdom-based investment company that specializes in prime real estate locations throughout London. We have a number of years of experience in the real estate market in London. Our experts provide professional results that minimize risks and provide a maximum return on your investment. The clearest indicator of the reliability and quality of the services we provide are the longterm contracts that we have established with our clients, many of whom reinvest with us annually and recommend our services to other investors. Whether you are a private investor or a corporation, we can provide you with a professional and effective solution to your investment goals.
OUR TEAM At TROBOR Capital, we understand that the success of our firm is based on the culmination of all of our experts, which is why we have carefully selected a team of experts within their fields to develop options for their clients that will be the most profitable and best suited to the individual needs of their clients. Our decisions are based on investment projects that are formed after extensive analysis of the real estate market which includes not only our own market studies, but also comparative sales analysis from other firms.
MAINSTREAM MARKET ANALYSIS It has been estimated that the total value of all the real estate in the world is about $180 trillion (US Dollars). Around 17% of this real estate is commercial property, and the rest is mostly residential. Of the owned residential properties, approximately 72% of them are occupied by the owner. The amount of investible commercial properties is about $20 trillion (US Dollars). About half of this is owned either indirectly or directly by individuals, and the other half is owned by corporate organizations. The center of the privately-owned properties are the properties that are privately held as opposed to real estate that is held through different investment structures. These private holdings have rarely, if ever, been compared to commercial real estate holdings. Most of the property owned by the approximately 200,000 ultra-high-net-worth individuals throughout the world is residential. These individuals tend to hold commercial propertied indirectly through investment agencies. These ultra-high-net-worth individuals only make up about 0.003% of the global population, but they collectively hold about 3% of the total value of the world s real estate value at an estimated $5 trillion (US Dollars). This means that these individuals are becoming more important to the real estate industry.
WORLD REAL ESTATE $ 180 000 000 000 000 Residential $150 trillion Commercial $30 trillion $5.2 TRN $0. 1 TRN $10 TRN $20 TRN $50 TRN $100 TRN $50TRN Non Investable Investable Directly owned by UHNWIS Non Investable Investable Privately-owned Investable real estate
MAINSTREAM MARKET ANALYSIS There has been a significant increase in the numbers of ultra-high-net-worth individuals in recent years, totaling nearly 200,000 in 2013. They have a combined wealth of $27.8 trillion (US Dollars), but it is expected that this total will surpass $40 trillion (US Dollars) by 2020. The following map shows the wealth s global distribution as well as the amount of that wealth that is in properties. As you can see, Europe, the Middle East, and Africa all have the greatest portions of their wealth in private real estate. On the other hand, North America and the United States in particular hold smaller percentages of their wealth in properties. This is because many Americans prefer financial instruments.
TOTAL UHNWI WEALTH HELD AS REAL ESTATE BY GLOBAL REGION 0% $0.63 TRN $2.39TRN 0 $0.23 TRN 0 $1.80 TRN 0 $0.04 TRN 0 $0.16 TRN 0 $0.08 TRN
MAINSTREAM MARKET ANALYSIS Since 2009, private wealth has almost tripled which makes it much more important when considering significant real estate deals being made worldwide. In this case, these private investment deals refer to real estate companies that are privately funded as well as Real Estate Investment Trusts. Most of these transactions occur in commercial properties and are not typically related with an investment of passion. This trend is an important one because it displays the commercial edge that private wealth has, which is being utilized in more than half of the largest property transactions throughout the world. Each of these transactions involved properties worth at least $10 million (US Dollars).
MAINSTREAM MARKET ANALYSIS More often, private wealth is seen in local deals as opposed to international ones. There is a much smaller number of these international transactions that are seen in regards to use of private wealth as opposed to local transactions. Even so, approximately 30% of the big international transactions that occurred in 2012 involved private wealth. It is estimated that this trend will continue and private wealth will become increasingly important in the real estate market. Previously, in 2007 and 2008, private wealth made up about 45% of the large deals made throughout the world. This contribution has since tripled in absolute terms and by about one fourth proportionally.
MAINSTREAM MARKET ANALYSIS In 2009, the amount of large transactions ($10 million US Dollars or more) was at a low point with around 7,400 deals made for a total of about $400 billion (US Dollars). By 2012, the numbers were back up and 10% higher than they were in 2007. There were an estimated 18,000 real estate transactions that took place totaling $900 billion (US Dollars). One of the most significant contributing factors to this increase was the addition of private investors. It has been estimated that the total contributions of these private investors to the real estate market increased the numbers in 2012 by 6,200 transactions and $190 billion (US Dollars). This calculates out to a difference of about 35% and helps prove that private investors are an important part and that the real estate market shouldn t continue to rely solely on corporate investors. It has been estimated that the total contributions of these private investors to the real estate market increased the numbers in 2012 by 6,200 transactions and $190 billion (US Dollars). This calculates out to a difference of about 35% and helps prove that private investors are an important part and that the real estate market shouldn t continue to rely solely on corporate investors.
MAINSTREAM MARKET ANALYSIS Every year, the additional amount of capital that is invested throughout the world is approximately $10 million (US Dollars), and a surprising amount of this comes from the private sector as opposed to corporate organizations. The numbers for corporate investments in real estate haven t changed much since 2007, where as the numbers of private and individual investments have increased by one third. Currently, it is only in the international transactions that the corporations have dominance. Much of the private investment increases come from Asia, whose private transaction numbers are more than triple of what they were in 2007. Taking a closer look at the flow details of these transactions will show how they are different from other traders in the market. Properties throughout Europe tends to attract international private funds which means that real estate capital is typically flowing into European countries. Asia, however, tends to have capital flowing out as they purchase real estate in other countries. Right now, Asia is buying more cross-border properties than other countries are buying properties in Asian countries. This direction of capital is completely opposite of what it was in 2007 when European and Middle Eastern countries were exporting capital while Asia was receiving it. Part of this reversal is due to the Forex trade rates of European and Middle Eastern countries falling while Asia currency grew stronger. A weakening of local investment organizations in Europe and the Middle East also helped pave the way for private Asian investors to get involved differently in the international real estate market.
MAINSTREAM MARKET ANALYSIS This shift in the Asian market, however, was primarily in the private sector, and European nations are actually still importing capital in the corporate sectors. This clearly shows that private wealth acts differently than corporate wealth, and that it is becoming increasingly significant to the real estate investment market. By understanding the geographical and other movements of this private investment capital, we can gain a better understanding of how ultra-high-net-worth individuals invest in both real estate and other sectors.
THE FLOW OF WEALTH
MAINSTREAM MARKET ANALYSIS The above map demonstrates the favorite locations of the ultra-high-net-worth individuals that are purchasing residential properties internationally. Not only does this map show where they prefer to live, but it also demonstrates where they are likely to make other investments and have other types of real estate holdings. As you can see by the map, many of these ultra-high-net-worth individuals do invest in international real estate, but they also prefer to remain close to what they consider home. North Americans in the United States in particular are fond of remaining in their own country. Similarly, Latin Americans prefer their own countries, but can be seen buying cross-border properties throughout the Americas and the Caribbean. Middle Easterners, Africans, and Asians usually stay closer to home, but spread further than most North and Latin Americans.
MAINSTREAM MARKET ANALYSIS Europeans tend to be the exception to this rule as they are the most dispersed of the wealthy individuals buying international real estate. Many of these individuals own residential properties throughout the world, as far-reaching as the Far East, the Caribbean, and North America. They also tend to travel with more frequency and distance than some of these other people groups. London is the city that is the obvious exception to this rule, attracting international residents from the United States, Asia, the Middle East, and other global regions. This trend is important in both the residential real estate market, as well as others, as the phenomenon of London s international attractions is not limited only to residential properties. The following table shows clearly that London was the number one city across the globe for international investment over the last year through June 2014. London has had approximately $42 billion (US Dollars) invested in office realty, with nearly $30 billion (US Dollars) of that coming from international investors. Only Paris and Sydney have similar trends of the majority of office investment coming from cross-border sources. However, the total amount of cross-border investors in both Paris and Sydney were significantly lower than London. New York, a close second to London in total office investment, has most of their $37 billion (US Dollars) coming from domestic sources.
Investment volume (billions) TOP CITIES FOR OFFICE INVESTMENT YEAR TO JUNE 2014 8 7 6 5 4 3 2 1 0 London Metro NYC Metro Tokyo Paris LA Metro SF Metro Domestic Cross-border By taking a look at other investment types throughout London, it is easy to see where these investments are coming from. Nearly 93% of the mainstream residential real estate throughout 2013 and 2014 was purchased by domestic investors. However, only 68% of prime real estate in residential sectors was purchased by domestic investors, leaving 32% for international investors. Across the board, there were similar percentages of foreign investments seen, the exception being in the area of the infrastructure and utilities of the United Kingdom. Source: RCA (London metro area)
INTERNATIONAL OWNERSHIP CROSS-BORDER INVESTMENT BY ASSET CLASS London prime London mainstream London office London retail London hotel UK quoted shares UK infrastructure & residential residential utilities 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 32 % 68 % 7% 93 % 57 % 43 % 43 % 2013-14 sales 2013-14 sales 2013 investment 2013 investment 2013 investment 2012 ownership 2010 ownership 57 % 54 % 46 % 53 % 47 % 38 % 62 % Domestic Cross-border
INTERNATIONAL OWNERSHIP CROSS-BORDER INVESTMENT BY ASSET CLASS
INTERNATIONAL OWNERSHIP CROSS-BORDER INVESTMENT BY ASSET CLASS The following table takes those percentages of international investments in all of these areas and shows the actual dollar amounts for these sectors. As you can see, the highest percentages of investment in these areas were in offices and hotels at 57% and 54% respectively. Upon closer examination, there are obvious differences that can be seen with the actual amount of capital being invested in these areas. International investment in offices is around $11.7 billion (US Dollars) whereas international investments in hotels only reached an estimated $0.8 billion (US Dollars).
INVESTMENT INTO LONDON S MAJOR COMMERCIAL ASSET CLASSES, 2013 % Cross-border All investment ($ billions) Cross-border investment ($ billions) Office 57% 20.5 11.7 Retail 43% 3.1 1.3 Hotel 54% 1.4 0.8 Apartment 38% 1.4 0.5 Industrial 17% 1.0 0.2 Source: RCA (London metro area)
INVESTMENT INTO LONDON S MAJOR COMMERCIAL ASSET CLASSES, 2013 There are a number of reasons that international buyers have provided when asked for their reasons for coming to London. The primary reason is business, as more than 85% of the homebuyers also work in London. The secondary reason that many people come to London is that they are looking to gain a foothold in the city, about 95% claiming to have a business interest in the United Kingdom. The biggest cultural advantages many people see in picking London above any of the other cities in the world is the English language. When surveyed, some of the other reasons people gave is that London is open for business, politically stable, globally connected, and has security of tenure.
WHY LONDON? STRUCTURAL & CULTURAL ADVANTAGES English language Culture & heritage Open for business Advantageous timezone Diverse neighbourhoods Secure & safe Financial centre Low interest rates Education Lack of bureaucracy Politically stable Tax regime Security of tenure Globally connected Restaurants Flexible labour market Entertainment Prestigious Wealth cluster Large & mature real estate market Innovative Cosmopolitan ICT centre Historic ties& relationships Creative centre Structural advantages Cultural advantages
WHY LONDON? London has global influences that shape its culture, and the economies of countries around the world will produce subtle but important impacts of the real estate market of London. In just five years, London could be influenced by an entirely new group of people. Based on a growing trend for new and emerging economies to create investors who are eager to grow their personal capital by keeping it in safe haven assets, there is a potential change in the type of international real estate in London and throughout the rest of the world.
WHY LONDON? These ultra-high-net-worth individuals frequently choose the purchasing of residential real estate as a way to create a safe haven for their capital. They become landlords in some of what are considered to be old world cities throughout the world, of which London is one. We are expecting that this growth in the number of landlords will continue, but these individuals will also become more motivated by income returns than simple capital growth, which means they will look for higher-yielding, second-tier cities and multiple locations in the Greater London area more than in previous years. The prime real estate assets in many of the cities around the world in which people are heavily invested have become fully-valued and this fact is becoming increasingly clear to investors. That means that these areas have less potential for capital growth. Additionally, the investors who already have investments in these other areas have begun looking for other areas in which they can invest.
WHY LONDON? Often times, these other areas are prime real estate in alternative global cities where there is an expectation of capital growth. Included in these opportunities are many of the second-tier cities and rural areas of the United Kingdom which means there is a slightly lower emphasis on London. The good news for London newcomers is that a great deal of wealth that is generated around the globe will continue to increase which means the interest in London won t completely disappear. Finding out how the economy is performing internationally can give a good indication of which countries will begin to invest outwardly into other countries. When the economy is strong in a nation, there is a greater amount of wealth that can be spread out to other nations. For London, a stronger economy may mean that more people stay in London to reap the benefits of this growth. Also, weaker economies in other countries may drive people to London to find better business opportunities. We anticipate that London real estate in both the mainstream and the prime markets will continue to be in demand because there is a continuing movement of people toward London from within the United Kingdom as well as internationally. Although we also expect that the amount of prime and ultra-prime real estate sold will begin to slow down as prices level out, we do believe this will open up more opportunities for real estate investments outside of London.
WHY LONDON? The table below demonstrates forecasts of economic growth in various countries throughout the next five years. Some of these countries will also have an increased chance of investing in international real estate. For example, Brazil is currently lacking in diverse global real estate investment and primarily invests in the United States almost exclusively. They are, however, expected to begin investing in other regions in the future, which may include London. Other countries, on the other hand, like Singapore and Hong Kong, may soon have a lesser interest in London. More activity has already been witnessed around mainland China as well as Malaysia. Some of the countries that are beginning to make a showing are the Philippines, Indonesia, and Nigeria. Keep in mind that for many of these countries, the preference to invest in new companies and land may be stronger than their desire to invest in residential properties. If this proves to be true, then there might be an increase in developmental funding and other organizations in the corporate market as opposed to prime real estate purchases.
GDP growth forecasts MAJOR MARKETS Very high growth ( 5% in 2019) High growth (3% to 4.9% in 2019) Moderate growth (2% to 2.9% in 2019) Low growth (1% to 1.9% in 2019) India Thailand Greece France Nigeria Saudi Arabia Russia Portugal China Hong Kong Ireland Switzerland Philippines Singapore United Kingdom Austria Indonesia Mexico Sweden Germany Vietnam Turkey United States Spain Malaysia Brazil Norway Japan Pakistan Australia Canada Italy Change from 2013, forecast growh in 2009
GDP growth forecasts MAJOR MARKETS
GDP growth forecasts MAJOR MARKETS Because the increase of the supply of prime property in central London is growing more rapidly than the actual demand, buyers may become cautious when looking to purchase residential property. The following figure displays the annual price growths throughout central London s prime real estate regions. As you can see, the greatest increase was in Marylebone at 14.9% since last year, with Islington and City and Fringe close behind at 14.4% and 14.3% respectively. On the other hand, the lowest increases were seen in Chelsea and Belgravia at 1.4% and 0.8% respectively.
ANNUAL PRICE GROWTH IN PRIME CENTRAL LONDON BY AREA A closer examination of the international buyers in the residential areas throughout the world revealed the most prevalent buyers of newly-built residential properties. In the following table, they are ranked from the most important buyers on down, along with the type of properties they prefer.
ANNUAL PRICE GROWTH IN PRIME CENTRAL LONDON BY AREA Country Preferred Cities Number of Bedrooms Average Purchase Price ( in US Dollars) Indonesia Singapore, Kuala Lumpur, and Sydney Singapore, Kuala Lumpur, and Sydney 2-3 bedrooms $3,300,000 Russia London, New York, and Monaco 2-3 bedrooms $3,010,100 China Hong Kong, New York, and London 2-3 bedrooms $2,800,700 India London, Dubai, and New York 3-4 bedrooms $2,600,000 United Arab Emirates London, Paris, and Geneva 2-3 bedrooms $2,500,100 Singapore London, Malaysia and Tokyo 2-3 bedrooms $2,300,700 Italy Geneva, Monaco, and London 2-3 bedrooms $2,260,600 Hong Kong Sydney, London, and Tokyo 3-4 bedrooms $2,100,700 The United States London, Paris, and Bahamas 2-3 bedrooms $2,050,300 The United Kingdom Cote d Azur, Italy, and New York 2-3 bedrooms $1,100,700
ANNUAL PRICE GROWTH IN PRIME CENTRAL LONDON BY AREA As is evidenced by the number of these countries that have London as one of their most preferred cities to buy residences in, it is clear that these international buyers play an important role in the international real estate market of London, particularly in newlybuild residences. It has been predicted that this interest in the London housing market will continue to grow and international demand will spread throughout the capital.
ANNUAL PRICE GROWTH IN PRIME CENTRAL LONDON BY AREA Currently about 51% of the real estate purchasers in prime central London are from the United Kingdom. Of the 49% of international buyers, 16.5% of them are from other European countries. The next largest percentage of international buyers is Russia and the Commonwealth of Independent States at about 9.1%. After that is the Middle East with approximately 7.5% of the international residential real estate purchases in London. However, not all of these purchases indicate residence. The actual amount of foreigners who reside in London is about 28% of the total residents. Research done by the Knight Frank Residential Research has shown that about 69% of the purchases of newly-built homes in London are international in nature, leaving just 31% for natives of the United Kingdom.
TOTAL VALUE OF UK HOUSING SOME STOCK ANSWER Trillion 5.2 GBP 186 GBP 344 GBP 306 GBP The total value of housing stock in the UK with London and the South East accounting for 42% The increase in the value of housing stock in the past year, of which 106 billion came from London The additional value of UK housing stock in 2007 The total value of housing stock in Scotland Billion 200 GBP 8 GBP 1.7 GBP 5 GBP The total value of housing stock in boroughs of Westminster and Kensington & Chelsea, 15% more than the whole of Wales The increase in the value of housing stock in Wandsworth in 2013, the highest figure outside of London The increase in the value of housing stock in Aberdeen in 2013, the highest figure outside of London The increase in the value of housing stock in Brighton & Hove over five years, the highest figure outside of London
TOTAL VALUE OF UK HOUSING The following graph indicates that there has been a slight increase over the last year in both annual mortgages and cash housing transactions. Despite this, the number of mortgages are still about 52% lower than they were when they peaked in May of 2007. Since December 2010, there has been an increase in cash transactions by 38%.
HOUSING TRANSACTIONS RECENT INCREASES IN FIRST TIME AND CASH BUYERS 65% fall in mortgaged home mover between March 07 & May 09 Mortgage home mover transactions remain 52% below their May 07 peak 38% increase in cash transactions since December 2010 Mortgage- First time buyer Mortgage- Home mover Mortgage- Buy-to-let Cash
HOUSING TRANSACTIONS RECENT INCREASES IN FIRST TIME AND CASH BUYERS There are currently over 8 million residents of London, which is a 14% increase since 2001. There are over 3.2 million households in Greater London, which is an 8.3% increase since 2001. Current projections predict that London s population will reach 9 million by 2021 and 10 million by 20%, which would be the most rapid growth rate ever. It would also mean that London may soon be more populous than New York City. There are several factors that go into this rapid population growth, including increased longevity, more live births within the capital particularly to immigrants. This huge population increase indicates that London is a desirable location for living, working, studying, and investing.
LONDON S CHANGING POPULATION Inner London Outer London Greater London The pattern of dominant investors in the European investment market is being changed by an increase in the international investors an decrease in the amount of investing of the typical European investors would be doing. These new international buyers want the high returns they can get in a low-interest rate environment. The following table provides details on the various types of investors and the specific strategies that they use in the global market.
MAIN INVESTOR TYPES AND THEIR INVESTMENT STRATEGY Type Source markets Destination markets Asset/ risk strategy Average deal size SWFs Middle East, AsiaPac UK,FR SPA, IT, BE Low risk, core assets; like JV with major local partners Private equity USA, GER, AT Pan- European Opportunistic; value add and secondary; like portfolios > 200m 150m Private/ family office GER, BE, SPA Domestic, UK Landmark assets 100m Insurance international FR, GER FR,IT,NL, PL, SPA Core to core plus; all asset types 80m German open-ended funds GER Pan- European Core; core plus in core markets; all asset types REITs UK, BE, CAN, MEX Domestic, GER, SPA Core to opportunistic 80m Property companies GER,SWE, USA,FR,AT PL,NL,SWE, GER High share of portfolios; prefer offices and industrial, retail in secondary locations 100m 180
TROBOR Capital 2013/2014 BLENDED PERFORMANCE DATA BY PRODUCT 114%* Investment Management (IMS) 21%* Distressed Asset(DAS) 17%* Development (DS) *- actual achieved/ projected net annual return on investment to investor
TROBOR CAPITAL LLP Berkeley Square House, Berkeley Square, London, W1J 6BD Phone: +44(0) 20 7205 2286 Fax: +44(0) 20 7205 2287 www.troborcapital.com info@troborcapital.com Market analytics provided by TROBOR Capital LLP. Analytics are based upon data from the open sources.